No, Swamy. Raghuram Rajan as RBI governor is what India needs right now

"My name is Raghuram Rajan and I do what I do," said the RBI governor, half-jokingly and with much pizzazz and swagger while addressing the media at a post-policy conference in September 2015. The question was whether the central bank was being hawkish in its outlook and dovish in its policy statement.

A hawkish stance favours high interest rates to keep inflation in check, while dovish prefers low interest rates to encourage growth in the economy. That the governor has been hawkish has been a criticism that Rajan has staved off since the Modi government was voted to power.

The pressure to cut interest rates has been intense and loud. So much so that the finance minister on several occasions has come forward asking Rajan to cut interest rates. 

Rajan, who has the unenviable job of drafting India’s monetary policy, which has evolved into managing expectations of the future, did what he thought was best to tame India’s inflation, which was hovering in double digits not too long ago. In fact, he has continued to reiterate that India’s core inflation is higher than what it should be. As RBI governor, he has a specific mandate to keep inflation under check within a stipulated time frame.

The argument his critics, including Rajya Sabha MP Subramanian Swamy raise is that high interest rates are deterring investments and holding back growth. However, Rajan has remained unperturbed by this barrage of criticism and instead adopted a measured approach. Interest rates have come down bit by bit, but the challenge has been to bring banks up to speed in passing on the cuts to the consumer.

It would be a safe assumption to make that there is none in the government who can match Rajan’s understanding of the problems of new-age economies. It’s also true that Rajan is known to have the prime minister’s ear on all matters related to the economy and that has left many perturbed. There are more in the government who would like to see him out than in.

It’s the leaders who define institutions and not the other way around. Every institution in India that has done well has been led by great leaders – from the Delhi Metro to ISRO to C-DOT (Centre for Development of Telematics) – these institutions were able to evolve and leave an imprint on India’s development trajectory for the vision and character their leaders brought to the organisations.

If we consider India’s central bank governors, we remember only the ones that left a legacy behind. Until liberalisation, RBI governors kept a very low profile - former Prime Minister Manmohan Singh was RBI governor between 1982-85. Post liberalisation, Bimal Jalan ( 1997-2003) emerged as a leader for steering India through the Asian financial crisis of 1997 and dollar floods in 2002.

Jalan also famously got along with both finance ministers, Yashwant Sinha and Jaswant Singh. One of his successors, D Subbarao, however, had a rough tenure. Barely weeks after he was appointed in September 2008, there was an economic crisis as one of the leading banks in the world, Lehman Brothers, went down under. The fact that finance minister at the time P Chidambaram decided to take on the governor publicly on many occasions didn’t help much either.

Chidambaram had famously said that he would "walk alone" to ensure growth in the face of tight monetary policy. Subbaro’s tenure was tumultuous because the world around had changed dramatically and he was fire fighting at home.

Rajan, also appointed by the UPA, first as chief economic advisor to P Chidambaram, tried his best to douse the fire set by Chidambaram’s "walk alone" comment at the time. He was quick to issue a statement saying that the government and RBI are on the same page. "No room for ambiguity here," the statement had said.

Greater integration with the world tests RBI’s deftness in dealing with three policy goals: free capital flows, fixed exchange rate and independent monetary policy. In 1965-66, the size of the current account and capital account as a percentage of gross domestic product was 14.1. By the early '90s, current and capital account increased to 31.5 per cent of GDP. In 1999-2000, it went up to 46.8 per cent. In 2011-2012, it stood at 109.6 per cent.

When Rajan took charge at RBI in September 2013, the economy was in a tailspin, the Indian rupee was on a free fall, there was a sense of nervousness in the equity markets and the government was gearing up for the 2014 election.

On his first day at work, he announced several measures to liberalise the Indian banking system. Rajan introduced a changed banking license regime with payments and small finance banks. These models will enable financial inclusion and have the potential to change India’s banking landscape. RBI is also working on "on tap" banking licenses.

Rajan has been batting for more power to banks to tackle stressed assets. He has worked on the new monetary policy framework for targeting inflation. Also, it’s been under his leadership that the RBI has adopted the Consumer Price Index as a measure of inflation, moving away from the Wholesale Price Index.

The first person to publicly suggest that India should stick to its fiscal deficit target was Raghuram Rajan at a time when there was a growing clamour to increase spending and slip on the fiscal deficit target. The advice that finance ministry clearly took very seriously and managed to win the confidence of investors across the world who were worried about India’s macro fundamentals.

Most importantly, Rajan has been at the forefront of the recognition of India's banking stress problem. Rajan has introduced new regulations for early recognition of stress, has created a mechanism for taking over the management of these companies through special debt restructuring.

He has boldly spoken on crony capitalism and nudged banks to pass on the rate cuts. Rajan is also bringing in changes at the RBI, streamlining it, make it more focused and agile through performance audits, training and development of human resources.

There are some who say that he might have overstepped his brief at times - calling India "a one-eyed king in the land of blind" was probably one of those moments. But having said that, it’s his vision and energy that can energise RBI for the India of tomorrow. And losing a world-renowned economist, who is also a successful technocrat, will truly be a loss.